In Graphics: What are Capital Gains?

WHAT ARE OCAPITAL GAINS? A capital gain is a profit that results from investing in a capital asset, such as a stock, bond or real estate. When you sell an asset for less than its purchase price, on the other hand, you incur a capital loss. Several factors determine the nature of your capital gain (or loss), including the type of asset and the duration of ownership. Capital gains apply to both businesses and individuals. COMPANY X MR. X Capital: the amount of cash and other assets owned by a CAPITAL ASSET EXAMPLES business or individual. Capital Asset: everything you own, including securities, real estate (personal residence or investment properties), furniture, automobile, coin and stamp collections, jewelry, and precious metals. STOCK MACHINERY LAND BUILDING A capital gain or loss results from the sale, trade, or exchange of a capital asset. Capital Gain: when the resulting transaction nets an amount higher than the original purchase value of the capital asset. SELL CAPITAL GAIN or TRADE or CAPITAL ASSET EXCHANGE CAPITAL LOSS Capital Loss: when the resulting transaction nets an amount lower than the original purchase value of the capital asset. A capital gain or loss can either be short-term or long-term. WHEN IS IT NOT A CAPITAL GAIN OR LOSS Stocks and assets rise and fall but any gain or loss is generally not a capital gain or loss until a sales transaction is complete. SHORT-TERM Short-term: the transaction occurs within a year of ownership LONG-TERM DAY OF DISPOSAL Long-term: the transaction occurs after more than a year of ownership. : DAY OF ACQUISITION OF DISPOSAL The period is determined from the day after acquisition the asset to the day of its disposal. It's important to know whether a capital gain will be long- term or short-term, since that affects your capital gains tax rate. + TAX Individuals and corporations pay tax on their capital gains, just like they do on their ordinary income, but capital gains are generally taxed at a lower rate. In some cases, capital gains can be offset by capital losses. Capital Gains Tax: a tax charged on capital gains. Capital gains tax rates are determined by the type of investment asset and the holding period. This is intended to provide incentives for investors to make capital investments and to fund entrepreneurial activity. Examples of taxable assets: + JAX MAX TAX RATE:28% COLLECTIBLES MAX TAX RATE:28% QUALIFIED SMALL BUSINESS STOCK MAX TAX RATE:35% MAX TAX RATE:25% INVESTMENT SECURITIES REAL ESTATE EXAMPLE OF CAPITAL GAINS TAXATION ON INVESTMENT SECURITIES SHORT-TERM CAPITAL GAINS LONG-TERM CAPITAL GAINS '03-'07 "08-'10 35 30 35 25 30 25 10 This was a result of the 10 Tax Reconciliation Act 10% 20% + TAX 25% 30% 35% TAX BRACKET 10% 15% 20% 35% TAX BRACKET % SOURCES: IRS.GOV, BARCLAYSWEALTH.COM, INC.COM, KIPLINGER.COM mint.com CAPITAL GAINS RATE 15% CAPITAL GAINS RATE %0E